3 Debts to Consider Not Paying Off

Catey Hill
, ContributorI write about money and careers for 20-and-30-somethings.Opinions expressed by Forbes Contributors are their own.

If you're having trouble paying all of your bills, some debts are more important to pay off than others. (Photo credit: Alan Cleaver)

D-E-B-T. It’s one of the most dreaded four-letter words in the country these days -- and dealing with it often leaves you wishing you could just snap your wallet shut, tell the company “too bad, I’m not forking over my hard-earned cash to you” and move on. In most cases, of course, you can’t do this without wreaking havoc on your credit score and risking an onslaught of phone calls from pesky debt collectors. But what happens when you simply can't pay all your debts? How do you know which debts to pay and which you may have to let slide?

Before I launch into an explanation of this, a caveat is in order. This article isn’t saying that you should just ignore your debts. In fact, financial advisers say that you should pay at least the minimum on all of your debts -- especially those that impact your credit score -- every month, and more if you can.

But let’s get real: Not all of us can manage to do that (especially in this economy), so sometimes, something’s gotta give. So when you're cash-strapped, as a general rule, “look at the consequences of not paying each debt and see which ones you can bear and which you can’t,” says Mike Sullivan, director of education for Take Charge America, a non-profit credit counseling company. So, in most cases, you’ll want to first pay for the essentials (like food and housing) that most impact your life, as well as your car (if you need it to get to or find work), and the things you can go to jail for not paying (like alimony and taxes) before your other bills, says Thomas Fox, the director of Cambridge Credit Counseling, a nonprofit financial counseling firm. You should also call your debtors to ask them to give you more favorable repayment terms, as many companies are happier to have part of their money than none at all, so are willing to lower your total bill or to give you more reasonable monthly payments, says Fox (click here for tips on how to do this).

But there’s more to it than those moves. Here are three debts that might be less painful not to pay off -- if you’re having trouble paying the minimum on all your debts -- depending on your situation.

1. “Unsecured” debts

If you can’t pay all of your debts, consider not paying off one of your so-called “unsecured debts,” which are debts like a hospital or credit card bill that aren’t backed by an asset, says Andrew Schrage, founder of personal finance site MoneyCrashers.com. The reason: When you don’t pay a “secured debt” (like a car loan), which is backed by an asset (your car), you can lose the asset since the bank can repossess it, but in the case of your “unsecured debt,” there is no asset to lose.

That said, you shouldn’t take this as a recommendation to just stop paying your unsecured debt, as not paying your unsecured debts can have the same impact on your credit score as not paying your secured debts, Schrage says. But if you’re in a bind and can’t pay all of your debts, you may want to consider non-payment of unsecured debts before secured debts so you don’t lose a valuable asset.

As for which “unsecured” debts to select, look at the debts you owe and see which would “hurt least” to not pay off. So, if you borrowed money from, say, mom and dad, consider talking to them about delaying payback because at least non-payment of that loan doesn’t hurt your credit score.

2. Underwater mortgage

Roughly 11 million homeowners are “underwater” on their mortgage, meaning they owe more than their homes are worth, according to real estate data firm CoreLogic. If you’re in this situation -- and are having trouble making payments on this and your other debts -- you may want to walk away. “If you’re majorly underwater, it may make sense not to pay,” says Eric Brotman, a certified financial planner with Brotman Financial Group. “It will damage your credit score to do this, but you shouldn’t be wasting needed cash on a house that may take multiple decades to be worth what you paid.” (Brotman estimates that being more than 25% underwater could be insurmountable. "If the market value remains unchanged, in a fixed 30-year mortgage it will take 144 months -- 12 years! -- to get to a 25% equity amount based on basic amortization schedules," he says. "Thus, if you are underwater by 25% and the market value doesn’t recover, it will take 12 years of payments just to get back to having the mortgage balance equal to the property value."). You can use a site like Zillow.com to figure out what your home is worth and what other homes nearby are selling for.

Still, "at the end of the day, it is still far better to satisfy the mortgage (or to have it modified by a lender) than it ever would be to walk away from a property," he warns. In other words, if you can pay, it's probably a good idea to.

3. Very old debts

This probably doesn't apply to many of you, but it's worth mentioning just in case. Federal law requires that credit reporting companies remove most debts from your credit report after seven years (more specifically, seven years from the date the debt became delinquent), says Sullivan. That means that if you have a debt that’s, say, been delinquent for 6 ½ years, you may not want to pay it off -- in favor of paying off more pressing debts like your car, home or utilities bills. That’s because not only has the old debt already wreaked havoc on your credit score, if you begin paying it after years of non-payment, you’ll “reset the clock” on the debt, Sullivan says. (This means that making a payment on that debt reaffirms the debt and the clock starts over -- more chance for collection efforts like legal judgments and more time on the credit report, Sullivan says. Then, "it is like a new debt," he says.)

Finally, if you feel really unable to manage your debt, contact the National Foundation for Credit Counseling at NFCC.org.